The Spending Monster Still Has Too Long A Leash

Gary S. Becker

March 22, 1993, 12:00 AM EST

Despite misgivings about higher taxes, Americans generally support President Clinton's proposals for tax increases because he has convinced them that they will significantly reduce the budget deficit. But if the past 12 years are any guide, federal spending is likely to expand as tax revenues grow.

Federal expenditures at the end of Jimmy Carter's Presidency in 1980 were $591 billion, and taxes brought in $517 billion, so the deficit was $74 billion. By the end of Ronald Reagan's second term in 1988, tax revenues had risen to $909 billion despite--or because of--the Tax Reform Act of 1986. That would have created a large budget surplus if federal spending hadn't risen even more, increasing the gap to more than $150 billion.

The trend during the past four years is even more revealing, since the defense buildup--started under Carter and accelerated by Reagan--tapered off. But notwithstanding the 1990 budget accord between Congress and President Bush in which he was persuaded to break his vow not to raise taxes, the deficit grew sharply, to $300 billion, because spending grew faster than taxes did.

And it did so despite the fact that the government shunted large expenditures onto the business sector. It mandated business outlays for environmental cleanup, aid to handicapped employees, old-age support, health care, and other programs.

HEAVY PRESSURE. President Clinton says he will both raise taxes and reduce spending, but his proposals put much more emphasis on tax increases than on spending cuts. But the net reduction in expenditures amounts only to a little over $100 billion, even after including the $55 billion in spending cuts Clinton says he will accept if Congress agrees to higher spending on jobs, roads, and other "investments." According to the Administration's estimates, the proposed hike in energy and income taxes will bring in about $250 billion of additional revenue during the next five years. And during the next two years, the Administration is not even asking for any reduction because the President wants an additional $30 billion to be spent on stimulating the economy--despite the strong 4.8% growth in gross domestic product during the last quarter of 1992 and 2%-plus growth during the whole of last year.

The heavy weighting of the President's proposals toward higher taxes and the deficits experienced during the past dozen years are not accidents, nor do they only reflect partisan conflicts. There are enormous pressures on Congress and Clinton to spend on thousands of programs favored by groups with political clout. In addition to the two biggest components, health and retirement benefits, the full list would take up many BUSINESS WEEK pages: It would include education and training programs to help children; a delicatessen of pork, featuring roads, public-transportation systems, and airports; the environment; assistance to the handicapped, minorities, and the poor; improving life in the cities; fighting drugs and crime; supporting Big Science and university research; and helping industry develop commercially viable technologies.

LONG ODDS. The President sought to weaken the opposition to new taxes and to make the proposed tax increases more popular by concentrating the hike in income-tax rates on the so-called rich, saying they do not bear their fair share of the tax burden. However, the White House greatly overstates the effect of these rate increases on government revenue because it neglects the adjustments to a steep rise in the tax rate from 31% to an effective tax rate of well over 40% when one includes the higher tax for medicare and the limits on itemized deductions. High-income families will convert more of their income into tax shelters, and some workers who have spouses with high incomes will drop out of the labor force.

Whatever additional revenue is actually produced by the income- and energy-tax increases will set off a battle in Congress and among the President's advisers over the wish to cater to the many powerful interests clamoring for greater government benefits, vs. the political advantages of lowering the deficit. Over the past dozen years, this battle has consistently been won by the advocates of more spending.

I do not claim that there is an iron law of democratic politics whereby expenditures always expand by more than added revenues. I say that powerful forces clearly push in this direction. It is stark testimony to the strength of this spending impetus that the Clinton team's search for programs that don't work or are no longer needed found only 11 in a budget of almost $1.5 trillion. Along the way, the plan exaggerates the feasible reduction in defense spending, disguises some tax increases as spending cuts, and attempts to shift the onus of cutbacks onto the opposition by challenging the Republicans to suggest programs to be slashed.

It appears that Congress has received the message sent by the public in the last election and is now determined to reduce spending by much more than President Clinton has proposed. I certainly hope so. But I wouldn't make book on it, taking into account the incredible appetite for government spending in the U.S. and all other democratic countries.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.